Running a small business? Don't forget your own finances - five top tips to make more of your money

The economic downturn has served to boost creativity, with millions seizing the initiative and setting up their own business.

Understandably, if you have recently set up your own business, be it a florist or a recruitment agency, you are
more likely to concentrate on the more immediate financial requirements, rather
than pension plans or long-term financial security - despite those being of equal importance.

Despite their ambition, most find themselves launched into the deep end when it comes to their own financial planning, here Andy James, of wealth advisersTowry, lays out some pointers for how small businesses, or the self-employed, can think ahead and plan for a more secure financial future.

New business: what you need to think about when planning your long-term finances

2. Get a pension

If you are a basic rate taxpayer you get tax relief at source. A payment of £80 into your pension will be grossed up to £100 which gives you an allowance for 20 per cent tax. This is an immediate 25 per cent return on your net investment.

If you pay tax at higher rates you can claim back the extra from HMRC via your tax returns. So, for instance, if you pay tax at 40 per cent you can claim an additional £20 back on the £100 gross pension payment meaning that a £100 payment will only have cost you £60. This is then a 66 per cent return on your net investment which is a very valuable benefit.

3. Don't forget your Isa allowance

Andy James says:‘Consider using your Isa allowance. Isas do not attract tax relief on contributions but they do offer tax efficient growth and tax free withdrawals. They also have the advantage over pensions of not tying your money up for the long term and can be accessed to invest in the business if required.’

Putting money into an Isa does not get the same tax benefits as with a pension. However, unlike a pension, which only allows you to take 25 per cent of the total amount built up as a tax free sum (the rest being taxed as if it was income), Isa withdrawals are not taxed.

As an example, when you retire and take money out of your pension as income it will be taxed. So, if you pay basic rate tax, £100 withdrawn will have tax deducted and you will be left with £80.

However, the same £100 taken from the Isa will give you the full £100 in your pocket - looking at it another way, you would only need to take £80 out of the Isas to get the same benefit as the £100 taken from the pension.

But, because many providers can pay rates as low as 0.1 per cent on long-standing cash Isas, it's important to do your homework. For the best rates on Isas, visit This is Money's savings rates tables, which are comprehensive, independently compiled, and updated daily.

If you invest within an Isa, any returns are free from capital gains tax and any dividend income incurs no extra tax beyond the 10 per cent charged at source. This makes an Isa investment tax-efficient and also a paperwork-buster, as you will not have to include anything within the wrapper on your tax forms.

4. Make the most of your investment profits

Andy James says:‘If you currently have investments, have you considered whether you have capital gains? If you do, it may be worthwhile considering realising sufficient investment to use up your annual capital gains allowance.

'If the annual allowance is not used, it is lost, and as it offers tax-free returns it is a highly valuable benefit which is often overlooked.’

Each year everyone has a capital gains tax allowance. Currently this is £10,600, meaning that any investment gains below this can be made tax-free - above it you will pay 18 per cent or 28 per cent, depending in whether gains push you into the higher rate tax band.

If investments have made gains you can use the allowance to withdraw money without paying any tax. If you do not use the allowance on a regular basis you lose it, as it does not roll over into different tax years.

So, if you have gains building up in your investments and don’t use the allowance regularly you can end up with a large capital gains tax bill if you decide to cash in the investments all in one go.

For instance, if you invested £100,000 and it doubled in value over the years and is now worth £200,000 and you then cashed it all in, you would have a £100,000 gain. You would have your annual allowance of £10,600 but would have tax to pay on the other £89,400.

Depending on your income the tax rate could be as much as 28 per cent on the total gain and you would therefore have to pay over £25,000 in tax. Using your allowances over the years could have reduced or even wiped out this tax charge.

Remember, when it comes to profits from your enterprise, if you sell or close your business, you may be able to claim Entrepreneurs’ Relief.

This means that you only pay 10% capital gains tax on any qualifying profits.

There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime, you must own at least 5 per cent of the shares in a company for a year and be director, partner or employee, of it a sole trader have been trading for at least a year. Find out more on Entrepreneurs' relief at gov.uk

5. Can you adapt?

'Your objectives may change, business needs change, investment returns change, tax rules change and when they do, what you have may need to change as well. Just because something was correct when you did it doesn’t mean that it will always be the right solution for you.'